Canadian dollar Underpinned by Fed’s Powell

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Federal Reserve Chair Jerome Powell’s remarks on Thursday underpinned the Canadian dollar. Mr Powell repeated comments from January 4 during a speech to the Washington Economics Club yesterday. He said, “We are in a place where we can be patient and flexible and wait and see what does evolve.” His remarks are a complete reversal from the comments he made during the post-FOMC meeting press conference on December 19. Back then, he implied that rates were going higher, implying that the December stock market volatility was just “noise” and not a major concern. Since that meeting, a series of Fed officials suggested that the Fed would be patient. Yesterday, Richmond Fed President James Bullard, a noted “dove” said the Fed did not need to raise interest rates any further. Mr Powell’s about-face suggests that he is now singing from the same page as the rest of the Fed choir.

Wall Street traders liked what they heard from the Fed chair, and they bought stocks. The Dow Jones Industrial Average has clawed back over half of its December losses since the beginning of the year. The stock market rally improved risk sentiment around the globe.

Mr Powell wasn’t the only reason stocks rallied. The US/China trade talks appear to be progressing well with both sides predicting a successful conclusion. China has already lowered some tariffs and taken steps to invigorate its economy. Chines officials said that they would cut corporate taxes and fees again in 2019. The Chinese yuan (CNY) soared, extending an uptrend that began this year.

The CNY rally sparked a significant improvement in global risk sentiment which led to broad currency gains against the US dollar this week and again, overnight. The Australian and New Zealand dollars were the best performing major G-10 currencies overnight followed by gains in Sterling and the Canadian dollar.

The shift in sentiment to “risk seeking” sparked another steep rise in oil prices. West Texas Intermediate (WTI) jumped to $52.38 from $52.16/barrel, and that move underpinned the Canadian dollar

The Canadian dollar is also supported by a somewhat hawkish Bank of Canada outlook. The BoC said in their policy statement on Wednesday that “policy interest rate will need to rise over time into a neutral range to achieve the inflation target.” A few economists are wondering why the central bank is sticking to a tighter monetary policy when other Central Banks, including the Fed, have indicated a pause in raising rates. They pointed to the BoC slashing its 20-19 growth forecast as one reason for their confusion.

There aren’t any Canadian data this morning’s leaving the US CPI report and Wall Street to drive direction.